• 3Q20 net profit of RM622m (+1% yoy; +55.3% qoq) and 9M20 net profit (RM1.59bn, -14.4% yoy) were within our and consensus estimates. The underlying performance for 9M20 was supported by higher non-fund based income while impacted by higher provisions.
• The quarters ahead could remain muted, as management may raise the NCC further to 50bps vis-a-vis its guidance of 40bps (9M20: 38bps; 9M19: 18bps). 9M20 net credit cost rose to 38bps (annualized) vs. 18bps in 9M19, with a total macro provision buffer of RM305m (22bps annualized).
• We keep our 2020E-21E earnings forecasts. Maintain HOLD with PT at RM5.00.

9M20 operating income down marginally, due to impact of the ‘mod-loss’

RHB’s 9M20 operating income declined by a marginal 2.7% yoy, with fund-based income declining 9.1% yoy attributable to the net ‘modification-loss’ of RM392.4m in 2Q20, while non-interest income rose 12% yoy (driven by higher investment and trading income, brokerage and wealth management fees). 3Q20 NIM recovered by 57bps qoq to 1.99% (given the lagged repricing of deposit costs and absence of the ‘mod-loss’) while 9M20 NIM averaged at 1.8% vs. 2.11% in 9M19. Meanwhile, RHB’s loan growth was ahead of most of its peers at +5.6% yoy and +3.5% ytd, mostly underpinned by mortgages (+7.9% yoy), business banking (+8% yoy) and its Singapore operation (+18% yoy). For 9M20, RHB saw the NCC at 38bps vs. 18bps in 9M19. 9M20 NCC stood at an annualized 38bps vs. 18bps in 9M19

What to expect ahead? Downside risks to earnings remain down the road

Earnings outlook in 4Q20 may be muted due to: continued proactive provisions, as management is mulling raising the NCC the most to 50bps for 2020, in view of the risk of a spike in defaults among the lower-income (B40) and certain business/corporate customers. Based on management’s guidance, about 10% (RM16.5bn) of its domestic loanbook is under relief/assistance/R&R programmes, comprising 10% of retail loans, 13% of business banking loans and 9% of wholesale banking loans. RHB’s ECL allowances (RM3.3bn; Stage 1 at RM1bn and Stage 2 at RM890m) and regulatory reserves of RM126.7m appear sufficient to buffer against a 1% impairment of its loanbook value, but we think it is prudent for management to raise its LLC further.

Maintain HOLD, Price Target unchanged at RM5.00

We maintain our HOLD rating on RHB, with our PT unchanged at RM5.00 (based on a 0.7x P/BV on CY21E BVPS) underpinned by a CY21E ROE at 7.7% and cost of equity of 9.6%. Our forecasts are unchanged, with the following assumptions for 2020E-23E: loan growth at 2-3% yoy; NCC at 30-40bps; CIR at 50%. Downside/Upside risks: interest rate cuts/hikes; higher/lower provisions.

Source: Affin Hwang Research - 1 Dec 2020